Wednesday, August 15, 2007

This Reuters article has everyone very concerned, since it seems to be saying that Freddie is now going to buy more Alt-A loans. Its description of the actual announcement from Freddie is pretty garbled, but we get a lot of that.

I have not yet found this Freddie Mac Media Advisory on Freddie's website, but I do have a copy of it and this is exactly what it says:

McLean, VA . . . Paul E. Mullings, senior vice president for single family sourcing at Freddie Mac (NYSE:FRE) today released the following statement regarding the Alternative-A market:

“Freddie Mac continues to be an active force in the Alt-A market and is taking steps to increase liquidity in the Alt-A market while maintaining its commitment to prudently and responsibly manage mortgage credit risk.

“Specifically, Freddie Mac is providing 90-day forward commitment capability on a negotiated basis to experienced lenders with credit terms that will accommodate a majority of the fixed and adjustable rate Alt-A product, including many of the reduced documentation mortgages underwritten with appropriate credit risk offsets that Freddie Mac now purchases on a bulk basis through structured transactions.

“Available credit terms specifically include reduced documentation mortgages under-written with appropriate credit risk offsets. This will give more Alt-A borrowers the security of being able to lock in their rate for up to three months.

“At the same time, we are committed to continuing our current bulk purchases of a wide range of Alt-A products on a spot bid basis.

“Going forward, based on our continual assessment of credit performance and market conditions we may determine to restrict credit terms available for certain higher risk mortgage products, including no-documentation and high LTV Alt-A mortgages.

“By taking these steps, Freddie Mac continues to fulfill its mission to provide stability, liquidity, and affordability to the US housing finance system and put more people in homes they can afford and keep.”

Here's what it means:

1. Freddie may or may not be increasing the total dollar amount of Alt-A loans it buys. This document doesn't say, one way or the other.

2. Freddie is now buying Alt-A loans in two ways, where it used to buy them only one way. The old way was through "bulk purchases" of loans the lenders had already closed. These bulk purchase transactions have always competed with the private "non-agency" securitization market, and over the last several years Freddie has lost most of those auctions: like the MIs, the GSEs have often refused to lower their risk-based pricing for this stuff. But now that the private securitization market has had a pall cast upon it, Freddie is making some purchases in the bulk side.

3. But bulk purchases only take closed loans off an originator's warehouse line. They don't provide "liquidity" to current originations. So what Freddie is doing is offering a "forward commitment" version of this to selected lenders, where Freddie will agree in advance to buy a bulk package of loans (at guidelines negotiated between Freddie and the lender) at a specified guarantee fee. This allows these lenders to start originating the product again, because now they have a price to put on their rate sheets. Remember that in the last few weeks, we've seen lenders with "no bid" or "this product not priced" showing up on their rate sheets.

4. This announcement doesn't say what kind of a price Freddie is offering on these forward deals, just that it is willing to put out a forward price. I would bet a fair pile of change that nobody is really going to like this price. But if it's a choice between using a forward commitment with Freddie to keep one's operation going until the private market "unfreezes" or just throwing in the towel today, I suspect a number of lenders will put Freddie's price on the rate sheet.

5. Notice that Freddie is also saying they might change their guidelines so they no longer buy Alt-A at the same standards they used to. I doubt this is an idle threat.

6. This has nothing to do with raising the portfolio caps or the conforming loan limit.

7. Remember back in June when Freddie announced it would commit $20 billion over 4-5 years to help with the subprime problem? The press went on and on about a bailout, but clearly Freddie's $20 billion wasn't quite enough to cover that bar tab. This won't be, either. But something is being done and is being seen to be done.

I'll keep you posted if I get any more real information regarding the dollar amounts in play here.